The federal estate tax packs a big punch with its 40 percent maximum rate. Fortunately, most people are not exposed to the tax, because it is only applicable on asset transfers that exceed $5.43 million.
However, everything that you own counts toward this figure, even your land. As a result, even if you do not consider yourself to be extraordinarily wealthy, you could be exposed to the tax if you own valuable real estate.
We should point out the fact that this tax is not applicable on asset transfers to your spouse. If you are married in the eyes of the law, you can use the unlimited marital deduction to transfer any amount of property to your spouse free of taxation, as long as your spouse is an American citizen.
Estate Tax Efficiency and Trusts
If you are exposed to the federal estate tax, there are trusts that can be used to provide estate tax efficiency. For example, you could use a qualified personal residence trust to transfer your home to a beneficiary at a tax discount.
There is another type of trust that is used for estate tax efficiency purposes called a generation-skipping trust. With this type of trust, the assets could benefit two generations, but there would only be one round of taxation.
A grantor retained annuity trust can be used to gain estate tax efficiency if you have highly appreciable assets in your possession, and there are charitable trusts that are also used for tax efficiency purposes.
All of these trusts are irrevocable trusts. You cannot change your mind, dissolve the trust, and take back the assets, so you are surrendering incidents of ownership.
On the other hand, there is another type of trust called a revocable living trust. These trusts are very commonly used by people who want to facilitate probate avoidance without losing control of the assets while they are living. Probate is a time-consuming legal process that would come into play if you use a last will as your asset transfer vehicle.
Because you do in fact retain control of the assets with a revocable living trust, they would be counted as part of your estate for estate tax purposes. These trusts would not provide estate tax efficiency.
Learn More About the Federal Estate Tax
If you would like to obtain detailed information about the federal estate tax, download our special report. This in-depth report is free, and you can access your copy through this page: Free Estate Tax Report.
Tax Efficiency Consultation
It is possible to preserve your wealth for the benefit of your loved ones if you take the right steps in advance. Personalized planning is key, and we would be glad to gain an understanding of your situation so that we can make the appropriate recommendations.
To request a free consultation, send us a message through this page: Grand Forks ND Estate Planning Attorneys.